The Dow Jones FXCM Dollar Index (ticker = USDollar) retreated from its two-and-a-half year high, but the slip failed once again to turn the persistent bull trend of the past months. However, the fundamental backdrop speaks to a deterioration in the greenback’s potential forward momentum; while the label of ‘over-extended’ is looking more and more appropriate for the benchmark’s lofty heights. Doubt arises via multiple angles for the dollar – most notably through stimulus. Amongst the world’s largest central banks, the Federal Reserve is by far the most liberal group when it comes to supporting its system. The $85 billion-per-month stimulus regime the Fed has maintained since the beginning of the year (upgraded from the $45 billion-per-month mortgage backed securities and $40 billion Treasuries recycling) is expected to remain in place through the end of the year. Setting that effort in an even deeper relief, we learned this past session that the ECB would allow its own balance sheet to shrink and the BoE was holding its small holdings steady (more on that below).

We have seen periods in the past where the Federal Reserve and Treasury’s stimulus efforts were overlooked by the market and demand for the dollar and dollar-denominated assets continued to outperform its counterparts. However, that strength was supported by a secondary influence – risk aversion. Where policy easing leaves the market awash in dollars, global fear ensures there is plenty of demand for the safe haven to mop up the supply. And, while there is reason to be skeptical; it is hard to deny that speculators still have their appetite. With the Dow Jones Industrial Average hitting record highs and the VIX hovering just above a five year low, that flight to quality isn’t a factor. So, excessive stimulus and limited risk paints a troubling picture for a safe haven at multi-year highs. On the other hand, it is easy enough to offer the dollar another strong thrust forward – through a strong risk aversion move. Optimism can decay to fear easily enough in a market based on external support, but a catalyst is the best way to make the transition. Perhaps the upcoming NFPs can offer a spark.

Euro Rallies Sharply after ECB Scoffs at Stimulus Expectations

The European Central Bank (ECB) has solidified the euro’s very unique position amongst the major currencies. With the policy authority’s decision to keep thing status quo this past session, Europe sports one of the very few economies actually drawing stimulus out of the system and seeing its market rates rise because of it. That is a significant appeal to FX traders that are looking for higher yields – and more importantly a rising yield which offers further capital gains – and the alternatives are either holding rates extremely low (like the Fed) or readying to ramp their efforts even further (like the BoJ). Heading into the group’s meeting, there was a definite expectation that ECB President Mario Draghi and crew would be more sympathetic to the ongoing recession and growing fiscal threat found in developments like the complicated Italian election. The statement and President’s Q&A revealed that discussion of a cut was easily overruled and even the concerns of the euro’s influence were tempered. As long as competitive stimulus (currency manipulation) is the primary concern – and risk trends are stable – the euro is in a strong position. Of course, ignoring the region’s future growth and financial risks could come back to bite the ECB and euro later on.

British Pound Shows Mixed Reaction to Mum BoE, Don’t Look AwayAs with the ECB policy gathering, there was considerable speculation heading into the Bank of England rate decision that the Monetary Policy Committee (MPC) would move to offer further stimulus. At the previous BoE meeting, it was revealed that Governor Mervyn King and two other MPC members called for an increase to the bond purchase program but were overruled by the majority. Yet, despite the risk of a triple dip recession, the government’s vow to keep to austerity and Europe’s withdrawal of support; the central bank passed up on the opportunity to ease. What is most surprising about this event though is that the sterling didn’t recover lost ground. Expectations can hold for only so long…

Japanese Yen: Now on to an Era of Unprecedented BoJ Stimulus

Most of the focus Thursday was on the ECB and BoE policy decisions, but the Bank of Japan (BoJ) had a meeting of its own. As the last official gathering headed by Governor Masaaki Shirakawa – and given his clear disdain for government pressures – it was the running consensus that the 101 trillion yen stimulus effort would be left untouched and no additional easing would be introduced before the new regime was installed. That expectation was well founded. It is interesting to note, however, that two members – Shirai and Miyao – both voted for more easing at meeting. Considering nominees Kuroda (Governor), Nakaso and Iwata (Deputy Governors) are easing bound, that’s spells a majority in April.

Canadian Dollar Ready for Volatility on Employment Data

Trends are hard to come by in the FX market, but volatility can be found with the right fuel source and ignition. Congestion for USDCAD after a strong climb to multi-month highs sets the scene for the combination of the US nonfarm payrolls (NFP) and Canadian labor data for February. The US data has offered few misses serious enough to stock risk aversion, so the most likely outcome is to support or at least leave the loonie to define the reaction. The Canadian jobless rate is seen ticking up and a 8,000 net increase in jobs sets the bar relatively low.

Swiss Franc: SNB May not be Buying More Euros, but It Isn’t Selling

We know that the Swiss National Bank (SNB) hasn’t had to defend its 1.2000-defined, EURCHF floor for a number of months thanks to the perceived reduced Euro-area tail risks. However, the central bank clearly thinks that fear can quickly return. Aside from warnings about reinforcing stimulus, we also find they have refused to unwind their Forex reserves for a fifth month – afraid of driving the franc higher.

Gold: Market Has Grown Extremely Quiet, Breakout Risk High

Market’s always return to a level of normality. And while ‘normal’ changes with time, the fact that the average daily trading range for the past week’s worth of trading for gold is near the lulls of the past few years suggests the risks of a breakout are growing. Fundamentally speaking, the pullback in the CBOE’s gold volatility index offers some sense of permanence to the dampened price action. Alternatively, the mix between the aggressive ETF unloading of the commodity and hold on stimulus this past session presents a renewed bearish pressure.

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